There is a continuing deterioration in the overall picture.
The Fed moving away from tightening - of both interest rates & their balance sheet clean-up - signals we are not ever going back to normalising. A decade on from the GFC, this is a major step. The global debt pile and fragility of the economy simply will not allow it.
The Treasury is also pushing the proverbial up hill with a rake as it struggles with the massive US deficit.
The U.S. Treasury is about to flood the market with debt to fund a $1 trillion deficit. Here’s why that is a worry.
By Joy Wiltermuth
Published: Aug 15, 2019 12:54 p.m. ET
There may be some limitations to the U.S. government’s borrowing after all. An anticipated surge of U.S. borrowing in the global debt markets in the second half of this year is starting to create concern as Treasury is expected to ramp up its issuance of bills, notes and bonds to fund a soaring $1 trillion budget deficit.
Not only does the Treasury needs to borrow to cover the fiscal deficit created by Trump’s 2017 tax cuts and the inability of Congress to agree on spending cuts, but Treasury needs to rebuild its cash balance which was run down to pay the governments bills when the debt ceiling was hit in May. The coming deluge of Treasury issuance has stoked worries on Wall Street about whether there is enough liquidity in the system in the short term to meet the supply without pushing up short-term borrowing costs and inverting the yield curve even further.
U.S. dollar liquidity is deteriorating and “is reaching a point where it may require drastic action if measures aren’t taken to address it soon,” warned Gaurav Saroliya, director of macro strategy at Oxford Economics, in a note on Wednesday.
To illustrate the concern, Saroliya pointed to the higher costs already faced by London-based banks lending to one other overnight in dollars, the popular dollar Libor-OIS spread, which has climbed in anticipation of the Treasury glut hitting markets.
U.S. Treasury cash balances at the Federal Reserve have dropped from about $400 billion to closer to $150 billion.
As the Treasury restores its cash balance with the coming supply, Saroliya expects liquidity woes to worsen, particularly in a scenario where long-term Treasury notes are yielding less than shorter-dated debt.
“With Treasury issuance set to surge in the wake of the recent debt-ceiling deal, an inverted yield curve could create a significant issuance indigestion in the market,” Saroliya wrote.
